for retirement? I'm scared not to.
Fear was my motivation for joining a 401(k) plan.
I got scared straight into saving in my early 30s. Back then, like
many fellow boomers, I believed that I would be forever young, despite
evidence to the contrary. Saving for retirement was something to
worry about down the road a piece.
I was fortunate enough to hear a talk by two
financial consultants at a meeting for professional women communicators.
They underscored the importance of saving for retirement, particularly
for women. The alternative, they warned, would be poverty, pure
and simple. They backed up their statements with alarming statistics
about what happened to women who did not take control of their financial
That was an awakening. On the one
hand, I could spend my golden years panhandling at an exit ramp
off I-95, storing my worldly possessions in a shopping cart, searching
for a shelter to stay in at night. Or on the other hand, I could
get on track to save for a modest retirement (it could have been
a lavish one had I started 10 years earlier) and spend my free time
volunteering at the wild bird shelter instead. Hmmmmm.
But too many people lack the motivation to save for
retirement, says a study released last week, conducted by human
resources firm Hewitt Associates, and researchers from Harvard University
and the Wharton School of the University of Pennsylvania. A lack
of motivation is the biggest obstacle to saving for retirement among
workers who either contribute minimally or don't contribute at all
to their 401(k) plans.
The study focused on the saving and investing habits
of some 620 employees identified as low savers at a Fortune 500
company. Researchers wanted to understand the "mind-set"
of employees who were not taking full advantage of tax-deferred
savings, even when the company matched a portion of their contributions.
- More than half of the low savers didn't know the
company offered a matching contribution;
- Nearly three-quarters didn't know the rate at which
the company matched contributions;
- More than half admitted ignorance about investment
- Just under half said they didn't understand the
investment options available within the plan.
So the logical next step for the researchers was to
see what would happen after the low savers were educated about this
stuff. This they did with half of the study's participants -- about
300 of them. They were taught about the potential gains from saving
in the plan. They were told that they were forfeiting, on average,
$1,200 a year in matching contributions. They learned about the
investment options in their plan.
- After getting this education, more than half remained
undecided about whether they would contribute enough to the plan
to get the company match;
- 8 percent said the loss of matching contributions
was insufficient to warrant a change in their behavior;
- 28 percent said they planned to raise their savings
- Only 15 percent actually did.
So they know what to do, but don't do it? Perhaps
these financial education programs lack that essential ingredient
that motivates me: the real threat of poverty in old age.
Fear of lawsuits
Fear motivates other players in the 401(k) arena, too. The fear
of getting sued explains why many employers don't dispense investment
advice to their workers. Although the law has been loosened in recent
years to allow companies more latitude in the advice they can offer
without risking a lawsuit, many are still gun-shy about offering
more than the blandest advice. They don't want to be held liable
for losses we may suffer when the markets take one of their inevitable
trips south. So, to avoid legal hassles, many companies hew to the
safe path of offering general education rather than specific investment
But the quality of these educational programs differs
substantially from one company to the next. William Arnone, who
wrote "Educating Pension Plan Participants" for the Wharton
School's Pension Research Council, envisions an employer-paid program
that employees could access any time, year round, that "would
include education both custom-tailored to an employer's specific
benefit plans and also individualized to each employee."
Such programs are rare, even among large companies
that can best afford them. Arnone estimates only 20 percent of large
employers offer a comprehensive education program. "The vast
majority of participants in 401(k) plans remain on their own when
it comes to obtaining financial-planning assistance. This dearth
of suitable financial education will become an increasing concern
to employees, their employers and to society," he writes.
The value of education
released earlier this year, also by the Wharton School's Pension
Research Council (penned by Steven Nyce), confirms that employee
access to high-quality financial communications has the effect of
markedly boosting participation and contribution rates in 401(k)
plans. Participation rates among employees receiving a "low-communication"
program run 62 percent vs. 84 percent for employees getting a "high-communication"
program, which in addition to plan information, also includes educational
materials, tools that enable employees to project retirement-income
scenarios and Web-based communications. That's a dramatic difference.
It's something that employers should keep in mind
when weighing the merits of providing a quality education retirement
program to their employees. It's a relatively inexpensive way to
attract and retain valuable workers.
It's also in employers' best interests to attract
as many employees from all levels of the organization as possible
to their 401(k) plans. Otherwise they risk running afoul of pension
laws designed to prevent discrimination favoring highly compensated
If your employer doesn't offer a comprehensive education
program, you must take it upon yourself to educate yourself to the
fullest extent possible about how much to invest and where to invest
The maximum you can contribute in a 401(k) plan in
2007 is $15,500 ($20,500 if you're 50 or older), though an employer
match can take that to a much higher level. Even if you have debt,
you should divert some money to your 401(k) plan -- at least enough
to get the full company match.
Read every scrap of information provided by your human
relations department. Learn as much as you can about how to allocate
your money and the investment options in your plan.
Devote all your free time for one week to this endeavor,
if that's what it takes. If you need incentive to get going and
the threat of poverty doesn't seem real to you, then tap into your
strong desire for financial freedom. Because, ultimately, that's
what we all want in retirement.